194 F.3d 323 (2nd Cir. 1999), 98-7931, Schlaifer Nance & Amp v Estate of Warhol

Docket Nº:Docket Nos. 98-7931(L), 98-7939(CON), 98-7940(CON)
Citation:194 F.3d 323
Party Name:SCHLAIFER NANCE & COMPANY, INC., Plaintiff-Counter-Defendant-Appellant, POWELL, GOLDSTEIN, FRAZER & MURPHY, LLP, JAMES C. RAWLS, C. SCOTT GREENE, PAUL K. ROONEY, ESQ., Appellants, v. THE ESTATE OF ANDY WARHOL, Defendant-Counter-Claimant-Appellee, FREDERICK HUGHES, VINCENT FREMONT and EDWARD W. HAYES, ESQ. Defendants-Appellees.
Case Date:October 19, 1999
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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194 F.3d 323 (2nd Cir. 1999)

SCHLAIFER NANCE & COMPANY, INC., Plaintiff-Counter-Defendant-Appellant,

POWELL, GOLDSTEIN, FRAZER & MURPHY, LLP, JAMES C. RAWLS, C. SCOTT GREENE, PAUL K. ROONEY, ESQ., Appellants,

v.

THE ESTATE OF ANDY WARHOL, Defendant-Counter-Claimant-Appellee,

FREDERICK HUGHES, VINCENT FREMONT and EDWARD W. HAYES, ESQ. Defendants-Appellees.

Docket Nos. 98-7931(L), 98-7939(CON), 98-7940(CON)

United States Court of Appeals, Second Circuit

October 19, 1999

Argued: July 1, 1999

Appeal from an order of the United States District Court for the Southern District of New York (Denny Chin, Judge) granting the defendants' motion for sanctions pursuant to 28 U.S.C. § 1927 and the District Court's inherent power. We hold that the District Court exceeded its allowable discretion in granting the motion.

Reversed.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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ANDREW L. FREY, Mayer, Brown & Platt, New York, NY (Melanie L. Oxhorn, of counsel), for Plaintiff-Counter-Defendant-Appellant Schlaifer Nance & Company, Inc.

OTTO G. OBERMAIER, Weil, Gotshal & Manges, LLP, New York, NY (Paul K. Rooney, Dana B. Zimmerman, Paul K. Rooney, P.C., of counsel), for Appellant Paul K. Rooney.

PAUL J. CURRAN, Kaye, Scholer, Fierman, Hays & Handler, LLP, New York, NY (Jenny Pearlman, Richard R. Mammon, of counsel), for Appellants Powell, Goldstein, Frazer & Murphy, LLP, James C. Rawls, and C. Scott Greene.

PAUL J. HANLY, JR., Coblence & Warner, New York, NY (Robert P. Boatti, of counsel), for Defendant-Counter-Claimant-Appellee The Estate of Andy Warhol and Defendants-Appellees Frederick Hughes, Vincent Fremont, and Edward W. Hayes, Esq.

Before: KEARSE, STRAUB, and POOLER, Circuit Judges.

STRAUB, Circuit Judge:

The appellants-plaintiff Schlaifer Nance & Company, Inc. ("SNC"), the law firm of Powell, Goldstein, Frazer & Murphy, LLP ("PGFM"), PGFM attorneys James C. Rawls and C. Scott Greene, and attorney Paul K. Rooney-appeal from an order of the United States District Court for the Southern District of New York (Denny Chin, Judge), granting the motion of the defendants-appellees-the Estate of Andy Warhol, the Estate's executor, Frederick Hughes, his assistant Vincent Fremont, and the Estate's counsel, Edward W. Hayes-and sanctioning the appellants, jointly and severally, in the amount of $400,000 for their roles in the pursuit of a civil fraud action against the defendants-appellees. The District Court found that the plaintiff's fraud claim was completely without a colorable basis, that the appellants' continued litigation was pursued in bad faith, and therefore, that sanctions were appropriate pursuant to 28 U.S.C. § 1927 and the court's inherent power. See Schlaifer Nance & Co. v. Estate of Andy Warhol, 7 F.Supp.2d 364 (S.D.N.Y. 1998) ("Schlaifer V").

We hold that these findings are clearly erroneous and, as a result, the District Court exceeded its allowable discretion in granting the motion. We therefore reverse.

BACKGROUND

The appeal presently before us is the latest chapter of a dispute that has simmered in the District Court since the early 1990s and that once before had found its way to this Court. See Schlaifer Nance & Co. v. Estate of Andy Warhol, 119 F.3d 91 (2d Cir. 1997) ("Schlaifer IV"). Thus, we are no strangers to the underlying facts of this case. Nevertheless, because the inquiry into the propriety of sanctions is critically dependent on the precipitating and developing facts below, we take the time to set forth with some detail the events that culminated in the current appeal.

SNC is a Georgia licensing company founded by Roger Schlaifer and Susanne Nance Schlaifer that is engaged in the business of marketing famous names and images. See id. at 93; Schlaifer Nance & Co. v. Estate of Andy Warhol, 927 F.Supp. 650, 652 (S.D.N.Y. 1996) ("Schlaifer III"),

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aff'd, 119 F.3d 91 (2d Cir. 1997). In late 1985, Roger Schlaifer sought to negotiate a licensing agreement with the commercial artist Andy Warhol. Warhol was represented by his business associate, Frederick Hughes, who, upon Warhol's sudden death in 1987, was appointed executor of Warhol's estate. As executor, Hughes, together with the Estate's counsel Edward Hayes, continued negotiations with Roger Schlaifer until they signed a licensing agreement ("Agreement") in the fall of 1987. See Schlaifer IV, 119 F.3d at 94.

This Agreement "was quite broad, and granted SNC many rights to license Warhol's artworks, name and likeness for items in the fashion, home decorating, gift, toy and entertainment industries." Id. SNC, however, became disenchanted with it when the Estate "began to disclose numerous problems regarding control over the rights to Warhol's works," specifically, third-parties who also asserted rights over certain Warhol works. Id. at 95-96.

Thus, as a previous panel of this Court explained,

[i]nfuriated by this sudden cascade of outside interests, SNC filed a complaint against the Estate in the Southern District of New York, alleging fraud and breach of the Licensing Agreement. SNC complained that for its licensing program to work effectively, it had to acquire the exclusive rights to all of Warhol's artworks.... SNC alleged that the Estate misled SNC by misrepresenting that it had exclusive control of Warhol's assets, and by not explaining that many of Warhol's works had fallen into the public domain.

Id. at 96. Soon after filing its initial complaint, SNC filed a second lawsuit, making additional allegations of breach of the Agreement. See Schlaifer Nance & Co. v. Estate of Andy Warhol, 764 F.Supp. 43, 44 (S.D.N.Y. 1991) ("Schlaifer I"). While these actions were pending in the District Court, SNC also submitted a claim in arbitration pursuant to an arbitration clause in the Agreement. See Schlaifer IV, 119 F.3d at 96. The arbitrators awarded a total of slightly over $4 million in damages to SNC for the Estate's conduct that occurred after the execution of the Agreement. See id. Of this amount, $1.5 million were in punitive damages, largely to reimburse SNC for its $1.46 million in legal fees.

"SNC then amended its pending [original] complaint in federal court to add Hayes, Hughes, and ... Fremont, as defendants" as well as a civil RICO claim against them. Id. at 96. The defendants moved to dismiss both complaints "on the basis that SNC had prevailed on its claims in the arbitration." Schlaifer V, 7 F.Supp.2d at 367. By memorandum endorsement filed on September 16, 1992, the District Court (Louis L. Stanton, Judge) denied the motion as to the original complaint and granted the motion on consent as to the second complaint. The District Court held that the arbitrators had awarded damages "only for post-contract expenses," but not for SNC's "pre-contract expenses." Id. In addition, it noted that the individual defendants had not been parties to the arbitration, and that the RICO claim had not been presented in the arbitral proceeding. As a result, the District Court concluded that the arbitration proceeding did not preclude SNC's action. See id.

On May 18, 1993, SNC filed a second amended complaint alleging fraud against the Estate as well as fraud and civil RICO against the individual defendants. The defendants again moved to dismiss the complaint, which the District Court granted by memorandum endorsement filed on February 18, 1994, with respect to the civil RICO claim. It also dismissed the fraud claim as to Hayes and Fremont, although with leave to replead. The District Court, however, allowed the fraud claim against the Estate and Hughes to stand, holding that the claim was pled with sufficient particularity.

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SNC then filed a third amended complaint on April 4, 1994, repleading its fraud claim against Hayes but not Fremont. The defendants moved to dismiss yet again, this time arguing that "SNC could not have relied on the alleged misrepresentations because they were contradicted by the language of the Agreement." Schlaifer Nance & Co. v. Estate of Andy Warhol, No. 90 Civ. 1095, 1995 WL 66408, at *1 (S.D.N.Y. Feb. 15, 1995) ("Schlaifer II"). The District Court denied this motion as well, holding that the Agreement did not "foreclose SNC's claim of justifiable reliance." Id.

On February 23, 1995, SNC's action, consisting only of the fraud claim against the Estate, Hughes, and Hayes, was reassigned for trial (Denny Chin, Judge). On March 29, 1995, the defendants inquired of SNC whether all documents responsive to document requests served on SNC in 1990 and 1993 had been produced. On April 19, 1995, just two months prior to trial, SNC produced over 3,000 documents, many of which, in the later view of the District Court, "showed that SNC and its attorneys were actually aware of, or suspected, that there were many problems with respect to the Estate's ownership of copyrights" in Warhol's works. Schlaifer V, 7 F.Supp.2d at 368.

Nevertheless, despite this belated production, the case proceeded to trial on June 20, 1995. SNC's allegations centered on several specific statements or omissions made by the Estate that SNC claimed were fraudulent. Among these, the most significant were: (1) Hughes's statement on May 18, 1987, that the Estate owned or controlled all the rights to Warhol's works; (2) Hayes's failure to disclose copyright problems in response to SNC's expressed desire to have "exclusive rights;" (3) Hughes's denial at a November 1987 meeting of the existence of a "watch deal" between the Estate and a watch manufacturer; (4) representations and warranties in the Agreement itself; and (5) various representations in an opinion letter ostensibly issued by a law firm, including the representation that "[t]he Estate possesses all right, title and interest" in Warhol's works "necessary to enable it to perform under the Agreement." Plaintiff's Trial Exhibit...

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